I’ve written several blog posts on how IRS collection works and the different options available to you such as installment agreements and offers-in-compromise but there’s one option of which you may not be aware: UNCOLLECTIBLE.
The focus of my practice in Severn, MD is to help taxpayers get in compliance with their IRS and state tax filings and to represent them before the IRS and the states with their tax collection issues. I work with individuals as well as business owners, and a lot of my business owner clients have employees.
So, what is Uncollectible Status, or Currently Not Collectible (CNC) as it’s sometimes called? If a taxpayer has no available equity in assets that can be sold or liquidated (such as a home or a retirement account) and doesn’t have enough income to cover their IRS allowable expenses, the taxpayer is deemed to be uncollectible.
(Keep in mind that I said “IRS allowable expenses” and not actual expenses. There’s a list published every year by the IRS that details the amounts to use for food, clothing, housing, vehicle ownership and operating costs, out-of-pocket medical, etc. While there are some actual expenses that can be used such as for health insurance, these published national standards exist for most categories.)
What happens if a taxpayer obtains Uncollectible status? Basically, nothing. The taxpayer’s accounts will be coded so that the IRS takes no levy action against them, and the taxpayer won’t be required to make any payments at the present time. The IRS will not take enforcement action against either the taxpayer’s assets or income.
We’ve talked about what uncollectible status is and what happens if a taxpayer gets it, but what will it NOT do for you? Well, it doesn’t actually resolve your outstanding tax issue. The IRS can revisit the case at any time and usually does so at least annually to see if the taxpayer’s financial situation and their ability to pay has changed. As a result, there is little peace of mind that goes with being uncollectible.
If it isn’t a long-term solution, and if you have to keep justifying your uncollectible status, then why in the world would you want it? One of the best things that happens when you’re uncollectible is that the 10-year collection statute continues to run. The IRS has 10 years to collect a tax debt from you. There’s a whole lot more detail that goes into determining the Collection Statute Expiration Date (CSED) date but here’s a simple scenario: If you filed your 2008 tax return in 2009, then the IRS would have until 2019 to collect the tax due on your 2008 return. If you came to me today for help with this tax debt because the IRS was threatening to levy your bank account and your wages, one of the first things that I would do is to determine your CSED date. Getting you in to Uncollectible Status for the few remaining months left on your collection statute would be a great solution for you.
Another reason that Uncollectible Status is a good place for some taxpayers to be is that it gives them time to get compliant so that they can make an offer-in-compromise (OIC) or request an installment agreement (IA). Before either of these collection alternatives can be requested, a taxpayer has to be in filing compliance by filing their back tax returns. They also have to be in payment compliance by paying their current year’s income taxes due either by withholdings from their paycheck if they’re employed or by making estimated income tax payments is they’re self-employed. Taxpayers can use the time they’re deemed uncollectible to get their unfiled tax returns filed and to get current with this year’s tax payments (or at least bide time until the beginning of the next year when they can start fresh with a new year in which they can be current in payments!).
I’ll get more into the dissipated asset issue in a future blog but this is where the taxpayer used an asset to pay something other than their IRS debt, such as cashing out their IRA to pay off their credit card debt. The IRS rationale is that they should have received that money so that amount will be required to be added to any OIC for the next three years.
There are so many ins and outs and different things to consider when trying to determine the best way for a taxpayer to proceed in settling their tax debt. My goal is to help taxpayers navigate this confusing and overwhelming situation whether it’s with the IRS or a state collection issue. I have clients not only in Severn, MD and Anne Arundel County, MD but all over the world since technology has made our world much smaller and our ability to work remotely much easier. Come see me or just give me a call or send me an e-mail if you need help with your tax compliance issue. You can reach me at:
Lisa D Church, CPA, EA, NTPI Fellow, MBA
7865 Clark Station Rd
Severn, MD 21144